In a speech following BoE’s Monetary Policy Report released yesterday, Governor Andrew Bailey elaborated on the two alternative scenarios laid out alongside the baseline forecast.
The first scenario envisions that heightened global and domestic uncertainty could suppress UK demand more than currently expected, “easing inflationary pressures”.
In contrast, the second scenario assumes that recent energy price increases could trigger renewed second-round effects in domestic prices, with tighter supply conditions “increasing inflationary pressures”.
Bailey emphasized that these scenarios are not simply stylized upside or downside risks to inflation but are meant to illustrate the underlying mechanisms that could shift the inflation path.
He stressed, “it matters whether inflation differs from the baseline because of demand or supply”. And, the size of the required monetary policy response might be different.
From a monetary policy standpoint, Bailey explained that a demand-driven downside scenario would likely warrant a stronger policy response than a supply-driven upside shock. That’s “simply because there is more of a trade-off to balance when inflation and activity move in different directions,” he added.
